It is an issue that has hung over the Kerviel affair from the beginning. Did Société Générale's desire to keep a 2.2 billion-euro tax rebate the French bank received in March 2008 after its multi-billion losses influence its decision to pursue Jérôme Kerviel, the “rogue trader” it blamed for those losses? A report written in 2008 by an expert witness for the prosecution authorities, a copy of which has been by Mediapart, France Inter radio and newspaper 20 Minutes, raises major questions over this key issue.
The report, dated May 14th, 2008, was written just two months after the French tax authorities agreed to pay 2.2 billion euros as a tax rebate to the bank after it said it had suffered a 4.9-billion-euro loss as a result of Jérôme Kerviel's rogue trading, details of which came to light in January 2008. French law allows a company to offset “exceptional” losses against its taxes and claim a refund. But it can only receive such a rebate if the company's losses were not a result of failings in its own internal controls and supervision.
Ever since the start of the affair Société Générale has insisted that it knew nothing of Jérôme Kerviel's risky trades and that he had hidden his actions from his superiors. But this report, which appears to have been shredded at some point before being reassembled, highlights the importance of the tax refund to the bank. Addressed to Jean-Michel Aldebert, the prosecutor in charge of the investigation into the affair at the time, the report states: “Subject to a tax ruling that has already taken place, Société Générale appears particularly interested to bring to light the existence of a complex fraud, rendering systems of internal control inoperative, faced with the risk of suffering an additional withdrawal of 2,197 million euros in extra corporation tax during the 2008 tax year.”
Enlargement : Illustration 2
So was the tax rebate of 2.2 billion euros a motivating factor in the bank's approach to the Kerviel affair? Certainly the bank's insistence it knew nothing of Kerviel's trades, its fierce determination to ensure the judicial system recognised it had lost 4.9 billion euros in having to unwind his trading positions and its legal action to recover that figure in full from Kerviel in damages, all show that the tax issue is no incidental matter as far as the bank is concerned.
During a hearing at Versailles court of appeal in mid-June, the bank's lawyers once again argued that it had no responsibility for the affair and continued to demand 4.9 billion euros in damages and interest from Jérôme Kerviel. However, the advocate general, representing the state, emphasised how, through its “failings”, the bank had “rendered possible or facilitated the carrying out of the fraud and its development” and that as a result it had no right to any damages or interest. After this argument by the advocate general the bank's lawyer Jean Veil took off his legal gown and left the hearing.
For behind the decision by the courts on whether or not to recognise Société Générale's own responsibility in the affair lies the question of whether the bank will have to reimburse the 2.2 billion tax rebate it got from the French state. “The deductibility of this charge [editor's note, the trading losses blamed on Kerviel] could however be called into question, if information revealed the failure of the company's internal controls to notice the accounting anomalies and irregularities that pointed to a diversion of funds, in circumstances suggesting either deliberate behaviour or manifest failure by the company's managers in the organisation of the aforesaid department or in the putting in place of control measures which could be at the origin, directly or indirectly, of the diversion of funds,” says the working document written in May 2008.
This expert report was signed by Cédric Bourgeois, who describes himself in the document as a specialist assistant. In fact, that term is misleading. For according to Cédric Bourgeois's biographical details, available online, he is an accountant and auditor. He was an inspector of investigations at the stock market regulator the Autorité des Marchés Financiers (AMF) then an analyst in the financial section of the High Court in Paris and gave courses to aspiring judges at the École Nationale de la Magistrature. Later Bourgeois heading the supervisory unit at the data privacy body the Commission Nationale de l'Informatique et des Libertés before working at UNESCO and Paris-Dauphine university.
When contacted by Mediapart Cédric Bourgeois refused to make any comment. His lawyer, Jérémie Chouraqui, said in a statement: “As a specialist assistant, M Cédric Bourgeois took the oath under article R50 of the criminal procedure code. Professional secrecy by which he is bound is thus absolute, general and without time limit. We would like to point out that a specialist assistant can only intervene in a criminal affair at the order of a judge who is, by definition, the recipient of all work carried out in line with the provisions of article 706 of the criminal procedure code.”
Other figures who were in the prosecution service at the time, and many of whom have since gone to the top administrative court the Council of State, were also contacted. They, too, refused to respond, some of them also saying they were constrained by rules on “professional secrecy”.
The report itself is a form of real-time summary of the investigation being carried out at the time by prosecutors. It starts by going back over the statements made by Jérôme Kerviel. He acknowledged that he had taken fictitious positions in order to mask his real positions. But the trader insisted, from the start, that his superiors were perfectly well aware of his excesses. During various interviews with the fraud squad and prosecutors these superiors denied all knowledge of the trader's actions. On one page the writer shows surprise that Kerviel's line manager, Martial Rouyère, had never been “the recipient or copied in on the electronic exchanges produced in support of Société Générale's complaint”.
Going back over the timetable of events, the report highlights the constant alerts that took place right through 2007 about Kerviel's operations and excessive positions. “The increase in the number of alerts in 2007 makes it barely plausible that M Kerviel's direct superior, M [Éric] Cordelle, did not have knowledge of his actions,” writes the expert.
However, it is above all the warnings from the clearing house Eurex, the organisation charged with the daily supervision of the Eurostoxx and Dax stock markets on which Kerviel frequently traded, that caught the attention of the report's author. On October 19th, 2007 alone, the report states, Jérôme Kerviel bought more than a million contracts on Eurostoxx and 150,000 on Dax. At the end of the day Société Générale had to pay two billion euros in margin calls on these positions alone. This was such an enormous sum that the report comes back to it on two occasions.
How was it possible that the bank had seen nothing? The report cites at length the statement made to investigators by the head of Eurex's surveillance unit, Michael Zollweg, going so far as to mark in bold the final phrase: “It is very obviously unusual that a single individual commits a bank to such sums … on the contrary, the margin calls were indeed paid in, there was no apparent problem, the bank was aware of the positions taken by its trader.”
'Questions raised about the behaviour of the plaintiff'
Enlargement : Illustration 3
As the report goes on, it raises more and more questions. The final chapter, chapter 6, is even entitled “The questions raised by the behaviour of the plaintiff” - a reference to Société Générale. The report's author goes back over the bank's statements in its annual report for 2007 and redoes the calculations of its losses, taking into account the tax rebate it had already received, which was 1,690 million euros at that time. “The calculation of the loss must take into account this tax reduction and can be kept to an amount between 787 million euros and 3,222 million euros (4,911 minus 1,690),” he advised, referring to the total losses posted by the bank minus the tax rebate it had received at that time.
But the report's author seems uneasy about this whole issue and even raises an eyebrow about the principle of the tax rebate. First of all, he writes, all the losses linked to the Kerviel affair were taken into account in the 2007 tax return, even though the losses were realized in 2008. This is completely against established accountancy principles and, the author writes, a departure from the rules.
The author is also unsure that Société Générale can claim such a tax deduction taking into account the malfunctioning and shortcomings already noticed in the bank's supervision system. In support of this line of reasoning, the expert cites the ruling by France's top administrative court the Council of State in the Alcatel CIT affair in October 2007. This judgement held that Alcatel could not claim a tax rebate following a loss caused by wrongdoing by one of its staff, taking into account the failings that the group had demonstrated.
The writer of the working document, Cédric Bourgeois, is not the only person to have analysed the situation in this way. From February 2008 onwards France's Ministry of Finance contacted experts to get their advice on a possible tax deduction for Société Générale based on its losses in the Kerviel affair. Asked for his view by ministry officials Michel Trudel, honorary president of the Compagnie Nationale des Commissaires aux Comptes, which represents external auditors, was completely opposed to the bank getting a tax reduction.
Trudel later explained his view publicly, highlighting the same reasons as were used in the prosecution's expert document. “In this particular case there are no possible [alternative] interpretations,” he told Mediapart in 2013. “One can only repeat the existing law. A ruling from the State Council delivered in October 2007 on the Alcatel case notes that a company cannot benefit from a tax deduction after a fraud if the company has failed in its controls or shown clear failings. That's certainly the case with Société Générale. The Banking Commission fined it four million euros in July 2008 for a failure in its systems of control.”
A large majority of experts came back with the same negative view. But the government audit body, the Inspection Générale des Finances (IGF), looked after things, helped by the then justice advisor at the Elysée, Patrick Ouard, who kept tight control of the case. At the request of Christine Lagarde, then minister of finance, the IGF quickly produced a report that cleared Société Générale of any blame. As early as March 2008 the state handed back nearly 1.7 billion euros (1.69 billion) in taxes under the principle under which firms can “carry back” their losses to a previous tax year. The state handed back another 500 million euros the following year.
Although such arrangements with public money are taken at the highest levels of state, the author of the prosecution's working document nonetheless advised that the tax authorities should be alerted to clarify issues surrounding the tax rebate, before concluding by highlighting the financial stakes for Société Générale and the extent to which it had an interest in obscuring its responsibilities in the affair.
Mediapart understands that several meetings took place between prosecutors and lawyers for Société Générale on the seventh floor of the financial crimes unit's building in Paris to discuss the case, and in particular this report. The bank's lawyers François Martineau, Jean Reinhart and Jean Veil have told Mediapart by email that “unilateral contacts of lawyers with members of the prosecution” at the court buildings or prosecution headquarters represent “habitual practice”. They declined to comment on the document, saying they were unaware of the “author, the recipient or recipients, the object or the content itself” of the document.
However, after the initial publication of this article in French, Société Générale put a statement on its website in which the bank criticised the “practices of media-judicial harassment orchestrated by media supporting the cause of Jérôme Kerviel” and dismissed a “supposed document” that had “mysteriously appeared eight years after events” and knowledge of whose existence it formally denied. The bank insisted that “the subject of tax treatment was not broached during the investigation, in which the object was to consider the criminal offences committed by Jérôme Kerviel”.
Meanwhile the former prosecutor in the case, Jean-Michel Aldebert, who is now a judge at the court of appeal in Paris, did not want to respond to Mediapart's questions. He said he “didn't see the point in expressing himself on an investigation which led to an order signed by two investigating magistrates to send Jérôme Kerviel before a criminal court, and to two criminal convictions, at first instance and on appeal.”.
It appears that the working document in question was later shredded, in circumstances and at a date unknown. But before that it had been buried. None of the comments, suggestions or lines of inquiry raised in the report were followed up by the prosecution or by the later independent judicial investigation led by judge Renaud Van Ruymbeke, who has remained very discreet over the affair, even after subsequent revelations from his principal investigator, Commander Nathalie Le Roy. She has subsequently claimed that she was “used” by Société Générale in her original 2008 investigation.
It seems that at no time during the investigation did the judiciary wonder about the bank's responsibility in the affair, about the faults and the failings that it could have committed. The tax authorities were never notified of any concerns.
In fact, the tax deal was carefully concealed. The judiciary never took into account the money paid back by the state to Société Générale when it calculated damages and interest, accepting without discussion the figure of 4.9 billion euros claimed by the bank. It took until 2010, when Kerviel was first convicted and ordered to pay billions back to the bank, for the tax repayment to be discovered.
Today the justice system seems to have woken up and is now starting to debate Société Générale's responsibility in the affair, an issue that was first raised eight years ago. The court of appeal at Versailles is currently deliberating over what, if any, damages Kerviel owes the bank. If later this year it follows the advice of the advocate general and awards no damages or interest at all, then Société Générale will have to repay the 2.2 billion-euro tax rebate it received from the state, as there is no statute of limitations for such matters. If so, then a whole new dimension to the Kerviel affair will have opened up.
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The French version of this article can be found here.
English version by Michael Streeter